China’s factory sector contracts for first time since 2016

China’s slowing economy is ending 2018 on a sour note.

The country’s huge factory sector contracted in December for the first time in two and a half years, according to government data published on Monday. It’s the latest sign of weaker momentum in the world’s second-biggest economy.

The official purchasing managers index slumped to 49.4 during the month, which was lower than what economists polled by Reuters had forecast. A reading below 50 indicates that manufacturing activity contracted compared to the previous month.

China’s economy is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels. Growth in 2018 is set to be the weakest since 1990. Analysts expect that next year could be even worse.

In recent months data has suggested that factories are seeing a slowdown in export orders amid trade tensions between the United States and China.

“The drivers of China’s slowdown have yet to have their full impact on the economy,” analysts at Moody’s wrote in a research note in December. “This creates a high degree of uncertainty and risk.”

Trade wild card

The big wild card is how the trade war between the United States and China, which began this year, will play out in 2019.

After imposing heavy new tariffs on goods worth hundreds of billions of dollars, the two sides are now trying to negotiate a deal by the end of February. If they fail, tariffs are set to rise further.

The economic hit from the trade war is expected to become more pronounced in China in the coming months, hurting exports and companies’ profits.

Fears about China’s economic health have already rippled through financial markets. The country’s benchmark stock index plunged into a bear market in June and is down almost 25% since the start of the year. The jitters have also affected markets in Europe and the United States.